How can Snapchat lose $515 million and be worth $25 billion?

The parent company of Snapchat, Snap Inc, published its IPO filing on Thursday night, revealing for the first time how much money the messaging app makes.

Snapchat is beloved of teens and young adults - as well as a fair few of their parents - but as soon as its accounts became public its ability to live up to a valuation of up to $25bn (£20bn) was called into question.

Snap lost $515m last year, while its filing revealed that user growth was already slowing.

How many people use Snapchat?

At the end of 2016, Snapchat had 161 million daily users, some 60 million of which are based in the United States and 10 million in the UK.

This compares with 400 million people who use Instagram a day, and 1.2 billion who use Facebook every day. although it is more than Twitter, believed to have around 140 million.

Snapchat is newer than its rivals, and still growing, but the rate of growth has slowed down significantly in recent months. In the last three months of 2016 daily users grew by 7 million, a slower rate than in most previous quarters.

Does it make any money?

In a word, no. Snap's losses actually increased last year from $372.9m to $514.6m, a lot of which was due to the extra cost of hosting all the pictures, videos and messages that run through Snapchat.

Since Snapchat was founded in 2011 it has racked up a total loss of $1.2 billion.

Snap makes money from selling adverts - companies can sponsor the lenses and filters used to augment photos, while short video clips play in between posts on the app. Last year it brought in $404.5m in revenue.

In its filing, the company warns as a potential risk factor that it "may never achieve or maintain profitability"

So how can it be worth $25 billion?

Snap is raising $3 billion and according to reports, gunning for a valuation of between $20 billion and $25 billion. That would make it worth more than Tesco or Sky. Not bad considering it lost $515m last year.

What investors will be hoping is that the company will shake off its early losses as it grows and the mobile advertising market becomes more valuable.

Snap has admitted that its growth is already slowing, but says its users are so dedicated that it can grow financially nonetheless. On average, its users spend between 25 and 30 minutes a day on Snapchat and open the app more than 18 times per day. And while losses climbed last year, revenues sextupled, suggesting there is plenty of money to be made.

Snapchat is a favourite of celebrities such as Eva Longoria and Victoria BeckhamCredit:
XPOSUREPHOTOS.COM

The company's filing makes much of the expected rise in global spending on mobile adverts and the potential to grow around the world. However, it admits that the good mobile connections required to send videos and photos using the app could harm progress in developing countries.

Analysts at Edison said $25bn is by far too high a valuation, suggesting $15.4bn would be more accurate.

What about the bosses?

Largely, investors will be placing their faith in Evan Spiegel and Bobby Murphy, Snap's two founders. Spiegel, its chief executive, is lionised by the tech world as a future Steve Jobs or Mark Zuckerberg figure.

Both Spiegel and Murphy own 21.8pc of Snap each, but have a majority of the voting shares, meaning between them they exercise control over the company's decisions. This will continue to be the case after the IPO because the new shares being issued won't carry any voting rights.

Bobby Murphy and Evan SpiegelCredit:
Corbis News

Even if Spiegel or Murphy are fired, they will continue to have a controlling interest in the company, and if one of them dies, majority control will pass to the other. Bizarrely, the company reports that both have "received threats in the past and are likely to do so in the future". Perhaps for that reason, Snap spent $890,339 on Spiegel's security last year.

Believing in Snap will mean ultimate faith in the two founders. A risky strategy perhaps, but one that worked for Google and Facebook.